Car Purchase, Loans, Debt, and Home Buying Strategies

Posted on Jan 3, 2025 in Economy

Expenses and Financing

Financing Rate

  • Compare financing rates and purchase prices from dealers.

Negotiating the Price

  • Some dealers negotiate, some do not.
  • Sticker price is the Manufacturer’s Suggested Retail Price (MSRP).
  • Negotiating by phone or fax may be beneficial.
  • Call several dealers.

Trade-in Tactics

  • Negotiate the new car price before mentioning a trade-in.

Value of Information

  • Shop around; information is valuable.

Purchasing a Car Online

  • Not as efficient as buying an airline ticket or a book.

Purchase vs. Lease Decision

Leasing

  • A popular alternative to buying a car.
Advantages of Leasing
  • No substantial down payment needed.
  • Return the car at the end of the lease.
  • Lower monthly payments.
Disadvantages of Leasing
  • No equity investment; you do not own the car.
  • Responsible for maintenance and damage.
  • Usually a kilometer limit.

Student Loans

  • Loans to finance post-secondary education expenses.
  • Obtained through the federal Canada Student Loans Program.
  • Set limits on borrowing based on assessed need.
  • Provincial programs cover what the federal program does not.

Full-time Students

  • Loan repayment begins after education is complete.

Part-time Students

  • Must make interest payments while studying.
  • Student loans must be repaid even after bankruptcy within 7 years of ceasing studies.

Debt Management

Improve Your Credit Score

  • Catch up on late payments.
  • Make at least the minimum payments on time.
  • Reduce your debt.

Review Your Finances

  • Analyze your budget and set a credit limit.
  • Analyze your balance sheet and cash flow statement.
  • Use financial assets to pay down debts immediately.
  • Cut expenses to increase net cash flow.

Excessive Debt

  • Spend as little as possible.
  • Consider how to obtain funds for monthly payments.
  • Get a debt consolidation loan.
  • Avoid credit repair services.

Consumer Proposal

  • An offer to creditors to modify payments.
  • Creditors have 45 days to object.
  • For debts less than $250,000 (excluding mortgage).
  • Removed from credit report after terms are met.

Bankruptcy

  • Individuals can file when insolvent.
  • Insolvent: owes at least $1000 and cannot pay debts.
  • Property goes to a trustee in bankruptcy.
  • Unsecured creditors cannot recover debts.
  • Trustee sells assets and distributes money to creditors.
  • Spouse is not affected by personal bankruptcy.
  • Bankruptcy is a LAST option.

Lesson 6: Study Notes

How Much Can You Afford?

  • Shop for a mortgage before house hunting.

Pre-approval Certificate

  • Provides a guideline on mortgage affordability.
  • Guarantees an interest rate for 60-120 days.
  • Mortgage approval is not guaranteed.
  • Shows buyers are serious.

Gross Debt Service (GDS) Ratio

  • Monthly mortgage-related debt payments divided by gross income.

Total Debt Service (TDS) Ratio

  • Mortgage-related debt plus other debt payments divided by gross income.

Affordable Down Payment

  • What is the market value of assets for the down payment?
  • Maintain funds for liquidity.

Home Buyer’s Plan (HBP)

  • Allows first-time buyers to borrow up to $25,000 from RRSP interest-free.
  • Up to 15 years to repay the HBP loan.

Affordable Monthly Mortgage Payments

  • Refer to your cash flow statement.
  • Mortgage payments may replace rent, but consider other expenses.
Larger Mortgage Payments
  • Less savings/investments.
  • Lower liquidity.
  • Greater financial risk.

Criteria for Selecting a Home

  • Price – stay within budget.
  • Convenient location.
  • Maintenance (newer homes have fewer repairs).
  • School system.
  • Insurance (higher for expensive homes).
  • Taxes – determined by the mill rate.
  • Resale value (location!).
  • Personal preference.

Relying on a Realtor

  • Home seller pays realtor commission.
  • Traditionally 7% on the first $100,000 and 3% on the rest.
  • Flat fees are becoming more common.

Realtor Services

  • Multiple Listing Service: database of homes for sale.
  • For Quebec: realtor.ca or centris.ca.

Negotiating a Price

  • Most sellers accept less than the asking price.
  • Seller may accept, reject, or suggest revisions.
  • Contract includes price, conditions, move-in date, and mortgage approval.

Ethics: Disclosing Defects

  • Law requires disclosure of defects affecting home value.
  • Disclosure is legal and moral.
  • Failure to disclose can result in a lawsuit.

Down Payment

  • Represents your equity investment in the home.

Conventional Mortgage

  • Down payment is at least 20% of the home’s value.

Transaction Costs of Purchasing a Home

  • Lender bears the risk of loan default.
  • Down payment provides a cushion for lenders.

High Ratio Mortgage

  • Down payment is less than 20% of the home’s value.
  • Lender requires mortgage insurance.
  • Mortgage insurance protects the lender.
  • Insurance premium may be paid or added to the mortgage.

Vendor Take-Back Mortgage

  • Seller is the lender.
  • Buyer makes payments to the seller.
  • Title transfers to the buyer.
  • Property transfers back to the seller if the buyer defaults.

Closing Costs

  • Home inspection fees.
  • Appraisal fee.
  • Real property report (land survey).
  • Land transfer tax.
  • Legal fees and disbursements.
  • GST/HST (on new homes).
  • Title insurance.
  • Interest adjustment.
  • Prepaid property tax and utility adjustments.
  • Homeowner’s insurance.
  • Loan protection life and disability insurance.

Mortgage Options

Amortization Period

  • Years to pay off the mortgage (maximum 25 years).

Mortgage Term

  • Period with fixed interest rate (less than or equal to amortization).

Payment Options

  • Frequency of payments (faster payoff means less interest).

Mortgage Type

Closed Mortgage

  • Restricts ability to pay off the mortgage early without penalty.
  • Offers a lower interest rate.
  • Prepayment privileges allow increased payments.

Open Mortgage

  • Allows paying off the mortgage at any time.

Fixed-Rate Mortgage

  • Fixed interest rate for the term.
  • Preferred when interest rates are expected to rise.
  • Lenders may negotiate posted rates.

Amortization Schedule

  • Discloses monthly payments based on mortgage amount, interest rate, and amortization period.
  • Each payment includes principal and interest.

Impact of Mortgage Amount

  • Larger mortgage amount means larger payments.

Impact of Interest Rate

  • Higher interest rate means larger payments.

Impact of Amortization Period

  • Longer amortization means lower payments but higher interest over the life of the mortgage.

Variable-Rate Mortgage (VRM)

  • Interest rate changes with market rates.

Characteristics of a VRM

  • Relatively low initial rate.
  • Allocation of payments to principal and interest changes with the VRM rate.

Convertible Mortgage

  • Allows renewal before the end of the term without penalty.
  • Useful when rates are expected to increase.
  • Allows locking in the current rate for a longer term.

Interest Rate Index

  • Initial rate is adjusted to stay in line with the prime rate.

Own vs. Rent

Costs of Owning

  • Mortgage payment.
  • Down payment.
  • Opportunity cost of the down payment.
  • Property taxes.
  • Home insurance.
  • Closing costs.
  • Maintenance costs.
  • Utilities.

Costs of Renting

  • Rent.
  • Tenant’s insurance.
  • Opportunity cost of security deposit.

Mortgage Refinancing

  • Paying off an existing mortgage with a new one at a lower rate.
  • Incurs closing costs and prepayment penalties.
  • Savings may exceed costs and penalties.

Rate Modification

  • Lenders may allow a “blend-and-extend” option.
  • Fixed-rate mortgage is revised to reflect the prevailing rate.
  • Avoids costs/penalties of refinancing.
  • Beneficial when planning to own the home for a longer period.

Lesson 7: Study Notes

Auto Insurance

  • Insures against legal liability, medical care, and damage to your car.
  • Provided by government agencies or private P&C insurance companies.

Auto Insurance Policy Provisions

  • Contract between insurance company and policy owner.
  • Specifies coverage for an individual and vehicle.
  • Three sections:
Third Party Liability Coverage (Section A)
  • Describes who has experienced loss you are responsible for.
Bodily Injury Liability Coverage
  • Protects against liability for injuries caused to others.
  • Covers injuries caused while driving someone else’s car with permission.
Property Damage Liability Coverage
  • Protects against losses when you damage another person’s property.
  • Does not cover your own car or property.
  • Purchase more than the minimum required coverage.
Accident Benefits (Section B)
  • Insures against the cost of medical care for you and passengers.
  • Covers medical payments, funeral benefits, loss of income, and uninsured motorist coverage.
  • Mandatory in all provinces except Newfoundland and Labrador.
  • Medical coverage applies to passengers and the driver of the insured car.
Uninsured Motorist Coverage
  • Insures against bodily injury caused by an uninsured driver.
  • Also applies to hit-and-run drivers or drivers whose insurance company goes bankrupt.